Ford Motor’s (F) earnings report earlier this week presented a microcosm for much of the third-quarter earnings season: Large overseas exposure is not the place to be for growth on the bottom line.
As the Wall Street Journal reported on Tuesday, the Detroit carmaker pushed its quarterly profit margin in North America to 12% — the highest in its history – delivering a pretax profit of $2.3 billion. Meanwhile, the company posted a pretax loss in Europe of $468 million.
Is that enough of a contrast for you?
Ford also said its European operations will lose $1.5 billion for the full year. The company said last week it will cut 6,200 jobs there and close three plants in an effort to save $500 million – certainly not what the struggling European labor force wanted to hear.
But this is largely par for the course, according to an article last weekend by Morningstar analyst Robert Johnson. In his view, the earnings reports up to the end of last week hadn’t been pretty and “the degree of ugliness seems to depend on how much exposure a company as to Europe and, to a lesser degree, China.”
Johnson says that revenue of S&P 500 companies from non-US countries averages about 20% to 25%, and he was “shocked” by how dependent some companies had become overseas revenue. He pointed to two specific profit-report disappointments in 3M (MMM) and DuPont (DD), which derive 66% and 61% of their revenue from outside the US, respectively.
Tech stocks also have taken it on the chin, falling 4.1% since Oct. 5. While Johnson says tech firms aren’t as dependent as some on non-US revenue, they did get much of their growth from emerging markets. In addition, European governments and their agencies have always been big buyers of tech gear.
The idea of limiting exposure to non-US revenue is the thesis of the All-American motif, which comprises companies with sales generated only from the US. This portfolio of stocks is off 2.4% in the past month. The S&P 500 has slipped 1.2% during the same timeframe.